Suppose that you have sued your employer for damages suffered when you recently slipped and fell on an icy surface that should have been treated by your company’s physical plant department. Specifically, your injury resulting from this accident was sufficiently serious that you, in consultation with your attorney, decided to sue your company for $500,000500,000500,000. Your company’s insurance provider has offered to settle this suit with you out of court. If you decide to reject the settlement and go to court, your attorney is confident that you will win the case but is uncertain about the amount the court will award you in damages. He has provided his assessment of the probability distribution of the court’s award to you in Table 7.16 (page 336). Let S be the insurance provider’s proposed out-of-court settlement (in dollars). For which values of S will you decide to accept the settlement? For which values of S will you choose to take your chances in court? Of course, you are seeking to maximize the expected payoff from this litigation.

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TABLE 7.16 Distribution of Possible Court Award Amounts Amount of Court Award Probability 0.025 0.075 0.10 0.125 0.175 0.20 0.30 tem $0 $50,000 $100,000 $200,000 $300,000 $400,000 $500,000